Christopher Ryon is portfolio manager of Thornburg Investment Management. He joined Thornburg as associate portfolio manager in 2008 and was named portfolio manager in 2009.

Chris holds a BS from Villanova University, an MBA from Drexel University, and is a CFA charterholder. Chris has over 30 years of experience in the investment management field. Before joining Thornburg Investment Management, he served as head of the long municipal bond group for Vanguard Funds, where he oversaw the management of more than $45 billion in 12 intermediate- and long-term municipal bond funds.

In 2013, Chris was selected as a member of the Municipal Securities Rulemaking
Board’s (MSRB) board of directors.

Nicholos Venditti is portfolio manager for Thornburg Investment Management. Nick joined Thornburg in 2010 as a fixed income research analyst and was promoted to ­associate portfolio manager in 2011 and portfolio manager and managing director in 2015.

Nick earned an MS in finance from Syracuse University, an MA in applied economics from the University of North Carolina–Greensboro, and a BA from Trinity University. Prior to joining Thornburg Investment Management, Nick spent three years working as assistant vice president for bond insurer FSA (now merged with Assured Guaranty Corp).

Raise your hand if you believe the
municipal
bond market represents a
screaming buy. We count a total of just
four hands—out of the hundreds (perhaps
dozens) of readers. Despite the
questionable scientific accuracy of this
informal poll, it highlights the disconnect
between the instincts of most municipal
bond participants and the broader investment
decisions that have permeated the
municipal market throughout the year.

All year investors have feared a shock—
any kind of shock—that would send the
municipal market roiling. Early in 2017,
those fears revolved around the prospect
of increased supply due to infrastructure
spending plans, deterioration of the
credit quality of the entire health-care
sector in the face of massive health-care
reform, as well as tax reform that would
evaporate demand as all of our marginal
tax rates fell with interest rates moving
higher based on optimistic visions of economic
growth. And yet, in spite of all of
those concerns, investors broadly bought
longer, lower-quality bonds, taking
on more and more risk for less and less
incremental yield.

All the while these fears lurked just beneath the surface,
it still seems as though the strategy of
many municipal bond participants relies
on taking outsized risk, praying they can
hit the sell button faster than the next
guy, should volatility rear its head.

Still skeptical? Let us give you an example. In
late May, the State of Illinois announced
that they were on the precipice of failing
to pass a budget for the third year in a
row. Given that it was the third time, it
shouldn’t have been that surprising. But,
investors, with their hands ever hovering
over the sell button, panicked. All of a
sudden spreads on Illinois paper blew out
by almost 150 basis points (1.5%) in the
span of 12 hours. It is worth noting that
Thornburg had no direct exposure to the State of Illinois, largely because we didn’t
believe the price reflected the credit risk.
After the spread blowout, however, we
added it to the portfolio. Within a week
or so, Illinois announced the passage of
a budget. A budget that, by the by, did
nothing to address the fundamental
credit issues in the state. And just like
that, spreads on Illinois tightened and
investors’ hands returned to their natural
position just above the sell button.
For what it is worth, we sold our position
at the new higher prices.

So it continued in the fourth quarter of 2017. Tax reform
came to fruition and sent the market
reeling. News reports surrounding the
elimination of the advanced refunding
provision as well as a possible elimination
of private activity bonds pushed
issuers to the market in record numbers.
Much like the Illinois case, investors initially
reacted with fear, then confidence,
then fear, and finally ended the year with
some confidence.

Where do we go from here? The reactions to tax reform, and
its effect on the supply side of the market,
in our minds, is overblown. While
it is certainly true that refunding bonds
have been a major driver of supply over
the past several years, it is important to
remember that the economic benefit of
refunding debt is predicated on lower
interest rates. To the extent that we
believe rate pressure is shaded higher,
the market likely would have seen substantially
less advanced refunding issuance,
in the near term, regardless of tax
reform.

The elimination of the SALT (State and Local Tax) deduction could
potentially impact demand in high-tax
states. Several of those states already
trade at extremely high prices, and the
others have potentially serious credit
issues. Spread widening in places like
New Jersey are likely to drown out any
price pop from investors looking to save
a little on their tax bill.

Demand is perhaps more interesting. The decrease in
corporate tax rates significantly reduces
the value of the tax exemption to banks,
insurance companies, and other corporate
municipal buyers. Should they rotate
assets out of the tax-exempt space and
into the taxable fixed income space, the
municipal market could lose as much
as 15% of the demand. This is far from
the majority, but certainly enough for
downward price pressure.

Pair this with renewed discussions around infrastructure
spending, the continued unwinding
of the Federal Reserve balance sheet,
and the prospect for several more rate
increases and there are quite a few opportunities
for volatility—especially in a
market where investors seem skittish and
eager to react to any perceived negative
news.

Are municipal bonds a screaming
buy? We are not going to raise our hands.
Risk is overpriced, and there are political
and economic events on the horizon
that could lead to a lot of action around
the sell button. That said, there is always
a reason to own municipal bonds. Asset
allocation, portfolio diversification, and
low long-term correlation to other asset
classes still provide strong reason to
invest in municipal bonds. One day we
will pound the table, or the television, or
the keyboard demanding you over allocate
to this asset class. In the meantime,
at Thornburg we will continue to focus
on risk and reward. On days when everyone
is selling out of fear, we are going
to look to be buying, and on days when
everyone is buying, we are content to sit
on our hands.

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Nicholos Venditti, portfolio manager and managing director at Thornburg, shares how he stays steps ahead of the next potential crisis in fixed income.

Important Information

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As of 12/31/17

1 Yr

3 Yr

5 Yr

10 Yr

Inception 1/1/1985

Limited Term Municipal Composite (Net)

2.77%

1.50%

1.64%

3.14%

4.88%

Limited Term Municipal Composite (Gross)

3.04%

1.77%

1.91%

3.57%

5.72%

Bloomberg Barclays 5-Year Municipal Bond Index

3.14%

1.72%

1.83%

3.54%

N/A**

ICE BofA Merrill Lynch 1-10 Year Municipal Index

2.83%

1.63%

1.72%

3.29%

N/A**

Performance data for the Limited Term Municipal Strategy is from the Limited Term Municipal Composite, inception date of January 1, 1985.

As of 12/31/17

1 Yr

3 Yr

5 Yr

Inception 4/1/2014

Low Duration Municipal Composite (Net)

1.25%

0.65%

–

0.65%

Low Duration Municipal Composite (Gross)

1.60%

1.02%

–

1.02%

ICE BofA Merrill Lynch 1-3 Year Municipal Securities Index

0.99%

0.69%

–

0.68%

Performance data for the Low Duration Municipal Strategy is from the Low Duration Municipal Composite, inception date of April 1, 2014.

As of 12/31/17

1 Yr

3 Yr

5 Yr

10 Yr

Inception 11/1/1991

Intermediate Term Municipal Composite (Net)

4.00%

2.19%

2.51%

3.99%

4.81%

Intermediate Term Municipal Composite (Gross)

4.44%

2.64%

2.96%

4.53%

5.55%

ICE BofA Merrill Lynch 3-15 Year Municipal Index

4.64%

2.56%

2.62%

4.39%

N/A**

Performance data for the Intermediate Term Municipal Strategy is from the Intermediate Term Municipal Composite, inception date of November 1, 1991.

As of 12/31/17

1 Yr

3 Yr

5 Yr

Inception 5/1/2009

Strategic Municipal Income Composite (Net)

4.29%

2.38%

2.97%

6.38%

Strategic Municipal Income Composite (Gross)

5.07%

3.15%

3.74%

7.28%

ICE BofA Merrill Lynch Municipal Master Index

5.42%

3.12%

3.17%

4.99%

Performance data for the Strategic Municipal Income Strategy is from the Strategic Municipal Income Composite, inception date of May 1, 2009.

Each composite above represents all assets under management in fully discretionary, fee based accounts. Returns are calculated using a time-weighted and asset-weighted calculation including reinvestment of dividends and income. Returns are annualized for periods greater than one year. Individual account performance will vary. The performance data quoted represents past performance; it does not guarantee future results. Portfolio returns net of fees may include management, advisory and/or custodial fees. Thornburg Investment Management Inc.’s fee schedule is detailed in Part 2A of its ADV brochure. Portfolio returns gross of fees do not reflect the deduction of management fees. Performance results of the firm's clients will be reduced by the firm's management fees. For example, an account with a compounded annual total return of 10% would have increased by 159% over ten years. Assuming an annual management fee of .75%, this increase would be 142%.

**Index not yet incepted.

Unless otherwise noted, the source of all data is Thornburg Investment Management, Inc., as of 12/31/17.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses.

The performance of any index is not indicative of the performance of any particular investment. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index.

Portfolio construction will have significant differences from that of a benchmark index in terms of security holdings, industry weightings, asset allocations and number of positions held, all of which may contribute to performance, characteristics and volatility differences. Investors may not make direct investments into any index.

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